Obama issues debt-ceiling warning

WASHINGTON (CNN) -- President Barack Obama sounded a stern warning Tuesday about the consequences to the nation if Congress fails to raise the debt ceiling. He also urged members of Congress to end the partial government shutdown.

"We're not going to pay ransom for" America paying its bills, he told reporters, placing the blame on the crisis squarely on House Republicans. "Let's lift these threats from our families and our businesses and let's get down to work."

Obama said is happy to talk with Republicans about issues they care about, but that "shouldn't require threats of a government shutdown" or economic chaos over the heads of the American people.

If Congress doesn't raise the debt ceiling, "every American could see their 401Ks and home values fall," and the country would see a "very significant risk" of a deep recession.

Failing to raise the debt ceiling "would be dramatically worse" than a government shutdown, he said.

Earlier, there was high-level phone call between Obama and House Speaker John Boehner, but no immediate sign of progress on reopening the government a week into a partial shutdown or reaching a deal to avoid the first-ever U.S. default next week.

Boehner demanded that Obama and Democrats negotiate with Republicans on steps needed to end the shutdown that began on October 1 and raise the nation's debt ceiling before the deadline for default on October 17.

"Americans expect us to work out our differences, but refusing to negotiate is an untenable position," Boehner said, adding that Obama and Senate Majority Leader Harry Reid are "putting our country on a pretty dangerous path" by rejecting GOP calls for talks.

Obama has refused to negotiate on the shutdown or debt ceiling, calling the need to fund the government and increase its borrowing power constitutional responsibilities that must be free of partisan politics.

The White House and Boehner's office agreed that little changed in the phone call Obama made to the speaker at 10:45 a.m.

Boehner spokesman Brendan Buck said Obama reiterated his refusal to include the debt ceiling and a short-term spending plan to end the shutdown in negotiations on broader policy issues.

A White House statement said Obama "is willing to negotiate with Republicans -- after the threat of government shutdown and default have been removed -- over policies that Republicans think would strengthen the country."

Obama also urged Boehner to allow a vote in the House on the Senate-passed measure to reopen the federal government, and called for quick action on raising the debt limit, the White House statement said.

In both cases, Obama said the House should pass "clean" proposals that don't have partisan amendments pushing GOP priorities, according to the statement.

Economists warn that failure to increase the amount the government can borrow to pay its bills would mean a spike in interest rates that would ripple through the U.S. economy, as well as other ramifications.

"If there was a problem lifting the debt ceiling, it could well be what is now a recovery would turn into a recession or even worse," Olivier Blanchard, an International Monetary Fund economist, said Tuesday.

The shutdown that began when Congress failed to authorize government spending for the new fiscal year that started October 1 entered its second week, while the October 17 deadline to raise the debt ceiling looms ahead for political leaders locked in partisan stalemate.

Boehner and conservative Republicans want to leverage the situation to wring concessions on deficit reduction and Obama's signature health care reforms from the White House and Democrats.

So far, the president and Senate Democrats have rejected the GOP efforts, causing the impasse that is escalating public anger against all the parties involved, especially Republicans, according to recent polls.

To keep up pressure on Obama and Democrats, House Republicans will propose a measure to set up negotiations on the debt limit and other fiscal issues, as well as one to guarantee paychecks for essential government workers are issued on time during the shutdown, GOP sources said Tuesday.

Rep. Tom Cole of Oklahoma, a GOP leader in the House, said a negotiating committee with Democrats and Republicans from both parties could pass a short-term extension of the debt ceiling while doing its work.

"I suspect we can work out some mechanism to raise the debt ceiling while negotiations are under way but we're not going to simply raise it without talking about the deficit," Cole said. It was unclear if his description would satisfy Obama's insistence that the debt ceiling increase must be separate from political negotiations.

Democratic Sen. Chuck Schumer of New York called the GOP proposals the latest in a series of "new gimmicks" that avoid the need to reopen the government and raise the debt ceiling before broader negotiations.

"We have a simple plea with them: Let's open up the government, pay our debts, and then we'll discuss anything they want in a forum in which they want to discuss it," Schumer said. "It's more of the same right now."

Boehner didn't mention the GOP proposals at a morning news conference, but he told reporters he wanted "conversation" with Obama and Democrats "to resolve our differences." Asked about any preconditions for such talks, Boehner said he wasn't "drawing any lines in the sand."

In the Senate, Reid could file a proposal as soon as Tuesday to raise the debt ceiling without addressing any deficit reduction issues demanded by Republicans, a Senate Democratic leadership aide told CNN.

Sources told CNN that the Democratic plan would resolve the debt ceiling issue for at least a year, and perhaps through the 2014 congressional elections.

The move would be the first volley in what will be a torturous political struggle in coming days over the federal borrowing limit leading up to next week's deadline to raise it.

Most Republicans would shy away from a bill that doesn't specify spending cuts or other policy changes in return for the increased borrowing authority.

Democrats are hopeful some Republicans would vote across the aisle to prevent the potentially catastrophic economic repercussions of a default.

If Senate Republicans require all the time-consuming steps available to them to delay action on the debt ceiling measure, a final vote might not take place until two days before the deadline for raising the borrowing limit, the Democratic aide said.

Such a Senate measure would increase pressure on the GOP-controlled House to do the same. But Republican House leaders have made clear they will insist on concessions from Democrats before agreeing to raise the debt ceiling.

Obama reiterated Monday that he will not negotiate with Congress while the country was under threat of a possible debt default.

"We're not going to establish that pattern," Obama said, adding that "we're not going to negotiate under the threat of a prolonged shutdown until Republicans get 100% of what they want" or under the threat of "economic catastrophe."

At the same time, the White House signaled a willingness to accept a short debt limit increase that would allow time for broader negotiations.

White House spokesman Jay Carney told reporters that "I'm not ruling out" a debt ceiling increase of any particular length of time, adding he believed a longer one was better because it would provide certainty after what Obama characterized as "manufactured crises" over similar brinkmanship in recent years.

"Our position is only that it ought not to be a political football, because it's a dangerous political football," Carney said. "And you know, fumbling that football can cost you a lot more than seven points. It can tank the economy."

Economists warn of dire fiscal impacts from failing to raise what is called the debt ceiling, such as a reduced U.S. credit rating that would spike borrowing costs. The economic blow and questions about America's fiscal fidelity could bring a global slowdown, Obama has warned.

Boehner and Republicans kept up the pressure on Obama to negotiate with them over the debt ceiling, characterizing it as an unprecedented unwillingness by a U.S. president do so.

"There's never been a president in our history that did not negotiate over the debt limit. Never. Not once," Boehner said Tuesday, adding that Obama negotiated with him over the debt ceiling in 2011.

On Monday, Senate Minority Leader Mitch McConnell later said divided government means the two parties have to negotiate solutions.

"Until Senate Democrats accept that reality, these crises will only be harder to resolve," McConnell, R-Kentucky, said.

However, one of Obama's top economic advisers, Gene Sperling, told a Politico breakfast on Monday that "the era of threatening default has to be over."

"If you sanction through negotiation the legitimacy of somebody threatening default, then that is going to happen over and over again," Sperling said. "So sanctioning negotiations with someone threatening default is not going to end the risk of default. It is likely to increase the chances that we as a country eventually default or even perpetually threaten our full faith and credit."

At issue is how to reach an agreement to fund the government in the newly started fiscal year and raise the $16.7 trillion debt limit.

Conservative Republicans intent on shrinking the government while trying to weaken Obamacare demand that any agreement on funding and raising the debt limit include their priorities.

"The debt ceiling is there for a purpose. It's like the smoke alarm," said House Financial Services Committee Chairman Jeb Hensarling, R-Texas. "Democrats want to unplug the smoke alarm, and Republicans want to go out and fight the fire."

Boehner has insisted that a deal to raise the debt ceiling must include deficit reduction steps that would lower costs of entitlement programs such as Medicare, Medicaid and Social Security.

However, he appeared to move away from the demand of the tea party conservative wing of his GOP caucus to dismantle or defund the health care reforms passed by Democrats in 2010 and upheld by the Supreme Court last year.

Obama and Democratic leaders want what are known as "clean" measures to fund the government for a short period and increase the debt limit, with no accompanying provisions involving contentious deficit reduction measures or GOP efforts to weaken Obamacare.

Once such measures are passed, they say, negotiations can take place on a full budget for fiscal year 2014 that began on October 1 and other issues such as reducing spending on entitlement programs.

Last week, a House Republican said on condition of not being identified that Boehner told GOP colleagues in private meetings he would not allow a government default to occur. But Boehner has remained adamant that an increased debt limit requires accompanying spending cuts.

On the shutdown, Obama and Democrats say the House would pass a Senate spending plan to end it if Boehner allowed a vote.

A CNN survey shows that 18 Republicans would join all 200 House Democrats in supporting the plan, exceeding the 217 majority needed for it to pass. At the same time, the CNN survey showed that fewer Republicans were willing to join Democrats in a procedural move called a discharge petition that would force Boehner to hold a vote.

Cole said Tuesday that Boehner told his caucus at a morning meeting that no such vote would take place.

"He basically said we're going to have a negotiation" instead of caving to Democratic calls to vote on the Senate version, Cole said.

Tea party conservatives forced Boehner to add anti-Obamacare amendments to the Senate spending plan that would end the shutdown, and the Senate and Obama rejected them.

According to Cole, the effort to dismantle Obamacare through the budget negotiations appeared dead.

"I think it's been overtaken by the debt ceiling," he said, adding that one specific proposal to repeal a tax on medical devices under Obamacare could be part of the broader negotiations by the special committee being proposed by House Republicans.

Reid suggested Monday that the Senate measure would pass the House if put to a vote, and Americans would realize the government was shut down "for no apparent reason."

Both Obama and Reid said Democrats were open to negotiate "anything" -- with the president specifically mentioning health care -- once the government shutdown ends and the debt ceiling gets increased.

House Republicans, however, fear losing their leverage in any talks by giving up those two points without any concessions.

In a new national poll released Monday, most respondents said the government shutdown was causing a crisis or major problems for the country.

While the CNN/ORC International survey also indicated that slightly more people were angry at Republicans than Democrats or Obama for the shutdown, both sides were taking a hit.

According to the poll conducted over the weekend, 63% of respondents said they were angry at the Republicans for the way they have handled the shutdown, while 57% expressed anger at Democrats and 53% at Obama.

"It looks like there is more than enough blame to go around, and both parties are being hurt by the shutdown," said CNN Polling Director Keating Holland.

Instead, Sahadi reported, lawmakers would have a few options to choose from that would have to be implemented right away -- cut government spending for the military and other discretionary programs by up to 33% every month; cut mandatory spending such as entitlement programs by 16% every month, and raise taxes by up to 12% every month.